Another unsurprising economic forecast that portends continued high US unemployment next year.
Politics and policy from inside Washington
From David Goldman’s Inner Workings blog (the actual post of chock full of charts, expanded explanation):
10. Exports are down by a quarter from their June 2008 peak.
9. Credit growth remains negative.
8. Weakness in existing home sales show that despite record low mortgage rates, screaming bargains in lower-priced homes, and tax breaks, the housing market continues to weaken.
7. The Fed’s Household Wealth Survey for the second quarter sounds impossibly optimistic.
6. Total consumer credit outstanding is still falling, and at the fastest rate since World War II.
5. Business are still reducing inventories, and at the fastest rate on record.
4. The Fed is caught between a rock and a hard place. Monetary stimulus remains out of control.
3. Dollar devaluation has helped about as much as it’s going to.
2. The effect of fiscal stimulus will come to an end: no more cash for clunkers, bailouts of bankrupt municipalities (by taking over their spending requirements), tax subsidies for mortgages, and so forth.
1. Barack Obama. By toying with a trade war with China in order to appease his organized-labor constituency, Obama has taken a giant step away from a prospective solution.
That is, has the economy snapped in such a way that it can’t bounce back to its previous form? This might be true in the labor market. Mark Thoma takes a shot at the issue:
The 400,000 number used above assumes that employment will return to its pre-recession levels, but if structural changes in the economy result in a lower normal level of employment, something many economists believe is a real possibility, then labor markets are even further off than indicated above. Personally, I believe that normal employment post-recession (i.e., after resources have moved out of housing, auto production, and finance and found new homes in other industries) won’t be far away from where it was pre-recession, but during the transition period, the rate of employment will be lower than pre-recession levels.
Me: Just how long will that “transition period” be? I think he is too flippant about the challenges of moving resources out of autos, housing and finance. Wow, the hopes for clear energy must be awfully high!
CEA Chair Christina Romer at the Chicago Fed:
The economic historian in me cringes every time I hear mention of “exit” from fiscal
stimulus and rescue operations in the current situation. “Exit strategy” is one thing—of course
we should be planning for the time when private demand has recovered and governmentstimulated
demand can be withdrawn. But to talk seriously about stopping policy support at a
time when the unemployment rate is nearing 10 percent and still rising is to risk nipping the
nascent recovery in the bud.
Yardeni sketches it out, though he thinks a “muddling along” is more likely:
1) Actually, the Petering Out scenario could start before yearend. Auto sales were clearly boosted during July by the Cash for Clunkers program. Congress expanded the program by an additional $2bn in August, and auto sales continued to rebound. Auto sales will probably weaken again unless it is renewed. Also, an $8,000 tax credit for first-time homebuyers will expire in November.
2) Furthermore, tax hikes are coming. The good news is that the Obama Administration hasn’t endorsed Charlie Rangel’s proposal to slap a big tax surcharge on high incomes as a way to pay for more government spending on health care. The bad news is that a massive tax increase is coming in 2011 after the Bush tax cuts expire next year. It is conceivable that consumers might cut back their spending in 2010 in anticipation of higher taxes.
3) Another concern is that the government will exit its various rescue programs prematurely. For example, last October, the FDIC provided temporary insurance guaranteeing the new debt of banks. Debt issued under the program is insured in some cases through June 30, 2012, and through December 31, 2012, in others. As of September 4, $304.1bn in debt was outstanding under the program. Ninety-four financial institutions have used it to issue debt.
4) The global economic recovery might also be at risk if Chinese authorities step on the brakes. During August, a few of them indicated that they are not happy to see that too much of bank lending has gone into real estate and stock market speculation. So they are leaning on the banks to lend less for such activities. Indeed, bank loans rose $60bn and $55bn during July and August, down from $181.5bn on average from January-June.
In conclusion, my sense is that a W-shaped economic pattern is widely expected. As the focus of investors extends beyond 2010, there are mounting concerns about the likelihood of the second recovery in this scenario, especially during 2011, if the Bush tax cuts are allowed to expire.
David Rosenberg draws an uncomfortable parallel:
Speaking of Japan, and we say this because the U.S. is following a very similar post-credit collapse pattern, we note that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. … So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market. … They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s. With U.S. T-bill yields close to zero, as they were in Japan, we have at least one market — the money market — that sees what we see, which is an economic outlook fraught with fragility, as is typically the case after a secular credit expansion moves shifts into reverse.